Chapter 15: Monetary Policy

Federal Reserve

Central banking system of the United States, created to be independent of political pressures.

Jerome Powell

Current Chair of the Federal Reserve, term ends May 2026, cannot be fired by the President.

Stagflation Risks

Economic condition characterized by slow economic growth and relatively high unemployment, along with inflation.

Open Market Operations (OMOs)

The main tool of monetary policy used by the Federal Reserve to control the federal funds rate.

Opportunity Cost of Holding Money

The loss of interest income from bonds or other investments when money is held instead.

Money Demand Curve

Graphical representation showing the inverse relationship between interest rates and quantity of money demanded.

Liquidity Preference Model

Model describing how interest rates are determined by supply and demand for money.

Federal Funds Rate

The interest rate at which banks lend reserves to each other overnight.

Expansionary Monetary Policy

Policy aimed at fighting recession by increasing aggregate demand through lower interest rates and increase in money supply.

Contractionary Monetary Policy

Policy aimed at fighting inflation by decreasing money supply and increasing federal funds rate.

Taylor Rule

A formula that suggests how the Federal Reserve should change interest rates based on inflation and output gap.

Moral Hazard

Risk that a party engages in risky behavior knowing that it is protected against the consequences.

Adverse Selection

A situation where sellers have information that buyers do not, or vice versa, about some aspect of product quality.

Aggregate Demand

Total demand for final goods and services in an economy at a given time and price level, represented as C + I + G + NX.